Investors bet against Japan retailers

MiaLamar

Japan's first sales-tax increase in nearly two decades has made the country's retailers targets for bearish investors but any easy gains may be behind them.

The volume of apparent bets against companies that sell items such as eyeglasses and electronics has risen more than 30% in the past nine months, according to securities-financing tracker Markit. Specialty retailers that rely on domestic sales for the bulk of their sales have been the most popular targets as investors bet consumers grappling with a higher sales tax will cut back on non-essential items.

Some of Japan's most well-known companies have been caught in the cross hairs. Department store operator Takashimaya Co. has seen the percentage of its shares out on loan--a proxy for short-selling--climb above 5% in recent weeks, a level of bearish activity not seen in almost three years. The stock is down 9% in the past year.

Many Japanese stocks have fallen this year after big gains in 2013. The retail sector, though, is under close scrutiny after the government, faced with huge deficits and debt, raised a nationwide sales tax to 8% from 5% at the start of April, setting off worries it would stall the country's nascent economic recovery. Six weeks later, though, there are signs the impact hasn't been as dramatic as feared, such as in a smaller-than-anticipated decline in April department store sales.

"We think that the consumption tax hike will not dent consumption in Japan significantly," said Michael Trace, a portfolio manager for Singapore-based Gordian Capital's Start22 Fund, which bets on and against Japanese stocks. "We are just seeing a typical hiccup because of a tax hike that has been overhyped."

Foreign investors in particular have grown frustrated with Prime Minister Shinzo Abe's economic revival program, the early fruits of which sent the Nikkei soaring 57% in 2013. The index is down nearly 15% this year, lagging the world's other major markets.

Specialty retailers that count on domestic consumers for the bulk of their sales have been the most popular targets of bearish investors, with an average 2.5% of their shares out on loan, twice average short interest on the Nikkei 225 index.

Still, Tomoyuki Takahashi, senior investment officer for active stock investments at Nomura Asset Management, said the picture of Japan's consumer spending has become muddied after a number of companies agreed to raise wages for the first time in years. Dozens of Japanese blue-chip companies said in March that they would raise base salaries for the first time since the global financial crisis. Many smaller ones followed suit.

"Household income is improving at the same time that consumer sentiment is deteriorating, creating conditions that are conducive to causing swings in spending patterns," Nomura stock strategists said in a note to clients last month. "That said, sales levels have largely been in line with expectations."

Japanese consumers may end up spending more despite the higher tax, if Mr. Abe and the Bank of Japan enjoy any success in their efforts to end years of deflation and raise inflation to 2% by 2015. Nicholas Weindling, a Tokyo-based portfolio manager for J.P. Morgan Asset Management, said individuals in Japan on average hold about 55% of their assets in cash, "very high by global standards."

"This works well in a deflationary environment but needs to change if there is sustained inflation," Mr. Weindling said. "We expect people to start consuming more."

A spokesman for Takashimaya said April sales declined less than anticipated, dropping 13% from a year earlier after rising 32% in March as consumers purchased big-ticket items ahead of the sales-tax increase. The tax increase may weigh on sales for a year or so, but consumer appetite is strong, he said.

Indeed, short interest in Japan retailers has been edging down in recent weeks. The percentage of eyeglasses maker Jin Co.'s shares out on loan rose as high as 12% by mid-April, double its levels nine months earlier. It was back down to about 8% as of May 14, however, coinciding with a more than 10% rebound in the stock.

A Jin investor relations representative declined to comment on the level of negative bets. He said the impact of higher sales tax hasn't been that big so far.

Write to Mia Lamar at mia.lamar@wsj.com and Kosaku Narioko at kosaku.narioka@wsj.com

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